Nutter  McClennen  &  Fish  LLP  Attorneys  at  Law  

Seaport  West,  155  Seaport  Boulevard,  Boston  MA  02210    www.nutter.com  

Fundraising with Angels Impact of the JOBS Act and New Advertising/Solicitation Rules

February 20, 2014

Jeremy Halpern Partner, Nutter McClennen & Fish LLP

Thomas V. Powers Associate, Nutter McClennen & Fish LLP

›  Nutter  McClennen  &  Fish  LLP  -­‐  Partner;  Director  of  Biz  Dev,  ECG  

•  Top  10  Boston  law  firm  •  Represent  clients  in  technology,  hardware,  software,  mobile,    medtech                                                      health  

IT,  biotechnology,  cleantech  CPG,  consumer  electronics  

›  MassVentures  –  Director  &  Investment  Committee  Member  

•  The  Venture  Arm  of  the  Commonwealth:  providing  seed  and  early  stage  venture  funding  to  high  growth  technology  startups  

›  Angel  Investor  –  Private  investor  in  multiple  technology  and  consumer  products  companies  

›  The  Capital  Network  –  Director;  Past  Executive  Chairman  

•  Providing  education,  resources  and  community  to  high  growth  entrepreneurs  and  angel  investors  as  they  navigate  the  early  stage  capital  process  

›  Previously:  Co-­‐Founder/VP  Biz  Dev  MobileTek  Corporation  

›  UC  Berkeley,  B.A.  (Go  Bears!);  UCLA  School  of  Law,  J.D.;  Admitted  to  practice,  CA  and  MA  

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Jeremy  Halpern  Biography  

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Thomas  V.  Powers    Biography  

Thomas  V.  Powers  is  an  associate  in  the  Business  Department  at  Nutter  McClennen  &  Fish  LLP  and  is  a  member  of  the  firm’s  Banking  and  Financial  Services  and  Emerging  Companies  practice  groups.  He  works  with  a  broad  range  of  institutional  and  early-­‐stage  clients  on  corporate  law  matters,  including  entity  formation,  corporate  governance,  equity  financings,  securities  laws  and  mergers  and  acquisitions.    

Thomas  gained  previous  legal  experience  working  as  an  intern  in  the  Boston  office  of  the  U.S.  Securities  and  Exchange  Commission  and  as  a  judicial  intern  for  the  Honorable  Robert  J.  Kane  of  the  Massachusetts  Superior  Court.    During  law  school,  Thomas  served  as  an  articles  editor  for  the  Review  of  Banking  &  Financial  Law.  

Thomas  has  written  extensively  on  JOBS  Act  implementation,  including  issues  relating  to  private  placements  under  Rule  506(c)  and  the  impact  of  proposed  crowdfunding  rules  on  issuers  and  financial  intermediaries.    He  has  participated  in  previous  TCN  events  on  JOBS  Act  implications  for  startups.  

Education  Boston  University  School  of  Law,  J.D.    cum  laude  

The  Catholic  University  of  America,  B.A.    magna  cum  laude  

Bar  Admissions  Massachusetts    New  York  

Nutter’s  Emerging  Companies  Group  

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As  a  full  service  firm  with  a  dedicated  team  of  lawyers  in  the  Emerging  Companies  Group,  Nu=er  supports  ventures  across    the  innova>on  economy:  

• Biomedical  Devices  • Biotechnology  • Pharmaceu6cals  •  Life  sciences    •  So:ware  • Hardware  •  Informa6on  Technology    

• Cleantech  • Mobile  • Consumer  Products  • Analy6cs  • New  Media    • Robo6cs  

We  provide  entrepreneurs  with  the  full  spectrum  of  support  that  they  need  to  build  their  businesses  and  realize  their  visions:  

• En6ty  Forma6on  •  Founders  Agreements  •  Financing  Strategy  and  Key  Introduc6ons  • Angel  &  Venture  Capital    • Debt  Financing  • Private  Equity  •  Ini6al  Public  Offerings  • Private  Placements  •  Strategic  Partnering  • Mergers  &  Acquisi6ons  

• Employment  support  • Equity  Compensa6on  • Tax  Strategy  •  Li6ga6on  •  Licensing  • Distribu6on  • Manufacturing  •  Supply  Agreements  • Electronic  Commerce  • Patent  and  Trademark  Strategy  &  Prosecu6on  

Fundraising  with  Angels  Impact  of  the  JOBS  Act  and  New  Advertising/Solicitation  Rules  •  Overview  of  U.S.  Securities  Law  

  Regulatory  Scheme  for  Startups    What  is  a  “Security”?    Registration  or  Exemption    Liability  

•  Fundraising  with  Angels      Private  Placements  under  Rules  506(b)/(c)    Pros  and  Cons  of  Rule  506(b)  vs.  Rule  506(c)  Offerings    What  is  General  Solicitation?  

•  Rule  506:  Rules  of  the  Road  

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 Overview  of  U.S.  Securities  Law    Regulatory  Scheme  for  Startups    

•  Regulators:  –  U.S.  Securities  &  Exchange  Commission  –  State  Regulatory  Agencies  

•  Securities  Laws:  –  Federal  Law  (Primary)  

•  Securities  Act  of  1933  •  Securities  Exchange  Act  of  1934  

–  SEC  Rules  and  Regulations  –  State  Securities  Laws  

•  Scope  of  Regulation:  Companies  that  offer  and  sell  “securities”  

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Federal  securities  law  defines  the  term  “security”  very  broadly    to  include,  among  many  other  things:  

– Stock  (including  Options  and  Warrants)  

– Convertible  Debt  

– Membership  Interests/Profit  Sharing  

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 Overview  of  U.S.  Securities  Law    What  is  a  "Security"?  

•  A  Company  that  is  offering  or  selling  securities  must  either:  

1. Register  those  Securities  with  the  SEC  (i.e.  engage  in  an  Initial  Public  Offering  (IPO));  or  

2. Find  a  Registration  Exemption    • Most  Frequent:  Rule  506  of  Regulation  D  

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 Overview  of  U.S.  Securities  Law    Registration  or  Exemption  

Failure  to  Register  or  Find  an  Exemption:  Civil  Liability  

(a) SEC    Entitled  to:  –  Disgorgement  of  proceeds  –  Civil  penalties  –  Prejudgment  interest  

(b) Investors    Entitled  to:  –  Rescission  of  transaction  –  Payment  for  any  losses  associated  with  the  transaction                

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 Overview  of  U.S.  Securities  Law    Liability  

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Fundraising  with  Angels    Private  Placements  Under  Rules  506(b)/(c)    

Rule  506  of  Regulation  D  –  Two  Exemptions:  

1.   Rule  506(b):  Pre-­‐JOBS  Act  Exemption  (a) No  limit  on  maximum  offering  amount  (b) General  solicitation  and  advertising  prohibited  (c) Permits  sales  to  unlimited  number  of  accredited  investors  and  

up  to  35  non-­‐accredited  investors  •  “Accredited  Investor”  includes:  

1)  Individuals  with  $1  million  net  worth  or  $200,000  annual  income  

2)  Private  Equity,  Venture  Capital,  and  Angel  Firms  • Self-­‐certification  permitted  

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 2.        Rule  506(c):  JOBS  Act-­‐Created  Exemption  (a) No  limit  on  maximum  offering  amount  (b) General  solicitation  and  advertising  permitted  (c) Permits  sales  to  accredited  investors  only  (unlimited  number)  and  issuer  

must  take  reasonable  steps  to  verify  each  purchaser’s  accredited  investor  status  

•  “Principles-­‐based”  method  of  verification  –  look  to  facts  and  circumstances  

•  Non-­‐Exclusive  Safe  Harbors  for  Natural  Persons:    o   Reviewing  copies  of  IRS  forms  that  report  income;  o Obtaining  written  confirmation  of  accredited  investor  status  from  a  licensed  broker,  investment  adviser,  accountant  or  attorney  

•  Self-­‐certification  not  permitted  (unless  investor  participated  in  previous  506(b)/(c)  offering)  

 Fundraising  with  Angels    Private  Placements  Under  Rules  506(b)/(c)    

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Fundraising  with  Angels  Pros  and  Cons  of  Rule  506(b)  vs.  506(c)  Offerings  

Rule  506(b)   Rule  506(c)  

Pros   Cons   Pros   Cons  Self-­‐Certification  of  Accredited  Investors  

No  general  solicitation  or  advertising  

General  solicitation  and  advertising  permitted  

Reasonable  verification  burden  on  issuer;  no  self-­‐

certification  

Angel  investors  may  be  more  comfortable  with  506(b)  (e.g.,  no  reasonable  verification  

requirement)  

Reasonable  verification  burden  may  chill  investment  by  angel  groups  and  other  

private  investors  

Can  sell  to  non-­‐accredited  investors  (but:  significant  

additional  disclosure  requirements)  

Proposed  SEC  rules  may  require  additional  hoops  (e.g.,  pre-­‐use  disclosure  of  

ads  to  SEC;  Form  D  pre-­‐filing)  

Can  change  from  506(b)  to  506(c)  offering  

Generally  cannot  change  from  506(c)  to  506(b)  offering  

Section  4(a)(2)  fallback  exemption  available  

No  Section  4(a)(2)  fallback  exemption  

No  sales  to  non-­‐accredited  investors  

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 Fundraising  with  Angels  

 What  is  General  Solicitation?    

What  is  “General  Solicitation”?    Congress  and  the  SEC  have  not  defined  general  solicitation.  

Less  Likely   More  Likely   Unknown  Offering  to  individual  investors  

with  whom  you  have  a  substantive  pre-­‐existing  relationship  

Television,  radio,  print  media  or    social  media  advertisements  

Demo  Days,  pitch  events  and  venture  fairs    

Meeting  individual  investors  through  personal  introductions  

Blast  emails  to  distribution  lists  regarding  offering  

Crowdfunding  websites  and    fundraising-­‐oriented  social  networks  (e.g.,  Angellist,  

WeFunder,    Gust)  

Offering  to  close  friends  and  family   Discussing  offering  with  press/bloggers  

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Rule  506:  Rules  of  the  Road  Key  Initial  Considerations:  

•  Who  are  my  existing  investors?  •  When  was  my  last  offering  and  on  which  exemption  did  I  rely?  •  Will  the  angel  groups  I  am  targeting  invest  in  issuers  that  conduct  a  Rule  506(c)  

offering?  •  Have  I  participated  in  any  activities  in  the  past  six  months  that  might  constitute  

an  advertisement  of  my  securities  offering  or  a  general  solicitation  to  potential  investors?  

Do:  •  Keep  track  of  Company  marketing  activities  •  Determine  whether  angel  groups  will  invest  in  Rule  506(c)  raises  •  Stay  up-­‐to-­‐date  on  rule  changes  to  Rule  506(b)  and  (c)  offerings  

Do  Not:  •  Advertise  your  offering  or  generally  solicit  investors  without  first  speaking  to  a  

qualified  securities  lawyer  •  Advertise  your  offering  or  generally  solicit  investors  unless  you  are  certain  about  

conducting  a  Rule  506(c)  (there  is  no  going  back  to  506(b))